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Regulatory Fog: The Informational Origins of Regulatory Persistence

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  • Patrick Warren
  • Tom Wilkening

Abstract

Compared with other types of policy, regulation is very persistent, even when inefficient. We propose an explanation for regulatory persistence based on regulatory fog,the phenomenon by which regulation obscures information about the e ects of deregulation. We construct a dynamic model of regulation in which the underlying need for regulation varies stochastically, and regulation undermines the regulator's ability to observe the state of the world. Compared to the full-information benchmark, regulation is highly persistent, often lasting inde nitely. The regulatory fog e ect is robust to a broad range of partially informative policies and can be quite detrimental to social welfare.

Suggested Citation

  • Patrick Warren & Tom Wilkening, 2010. "Regulatory Fog: The Informational Origins of Regulatory Persistence," Department of Economics - Working Papers Series 1113, The University of Melbourne.
  • Handle: RePEc:mlb:wpaper:1113
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    File URL: http://fbe.unimelb.edu.au/__data/assets/pdf_file/0011/801020/1113.pdf
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    References listed on IDEAS

    as
    1. Douglas Gale, 1996. "Delay and Cycles," Review of Economic Studies, Oxford University Press, vol. 63(2), pages 169-198.
    2. Marco Ottaviani & Giuseppe Moscarini & Lones Smith, 1998. "Social learning in a changing world," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(3), pages 657-665.
    3. Nancy L. Rose, 1985. "The Incidence of Regulatory Rents in the Motor Carrier Industry," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 299-318, Autumn.
    4. Zhao, Jinhua & Kling, Catherine L., 2003. "Policy persistence in environmental regulation," Resource and Energy Economics, Elsevier, vol. 25(3), pages 255-268, August.
    5. Pindyck, Robert S., 2000. "Irreversibilities and the timing of environmental policy," Resource and Energy Economics, Elsevier, vol. 22(3), pages 233-259, July.
    6. Robert N. Rubinovitz, 1993. "Market Power and Price Increases for Basic Cable Service Since Deregulation," RAND Journal of Economics, The RAND Corporation, vol. 24(1), pages 1-18, Spring.
    7. Dirk Bergemann & Juuso Valimaki, 2006. "Bandit Problems," Cowles Foundation Discussion Papers 1551, Cowles Foundation for Research in Economics, Yale University.
    8. Kenneth D. Boyer, 1987. "The Costs of Price Regulation: Lessons from Railroad Deregulation," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 408-416, Autumn.
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    More about this item

    Keywords

    Regulation; Information; Experimentation;

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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